Three Myths That May Be Hurting Your Credit Score
Don’t believe everything you hear regarding credit
Common financial myths persist among a large part of the population that are hurting Americans’ credit scores. When asked about how a number of basic actions would affect a person’s credit – including canceling a card, carrying a balance or paying a bill late – the majority of Americans answered incorrectly during a recent survey completed.
Let’s bust these myths with facts and tips to help you improve your credit health. Having good credit can save you money in every aspect, from lower annual percentage rates on loans to better insurance rates, and can make it easier to rent an apartment and even obtain a job.
The first myth being told is carrying a balance from month to month helps your credit score. The actual truth is the lower your balance, the better. Aim to keep credit utilization low for a high credit score. The rule of thumb is to have thirty percent credit used to seventy percent available.
More than have of the individuals that participated in the survey didn’t know that carrying a credit card balance does nothing to help a person’s score. In fact, carrying a balance is both unnecessary and costly. You’ll likely pay double-digit interest rates on your debt and get no benefit to your credit score. What does help a score is lowering your credit utilization – that is, how much of your available credit you’re using. Spending on your credit cards is important for good credit health. You need to make only the minimum payment to keep your account in good standing, but your best move is to pay the balance in full every month to keep your utilization low and avoid paying interest.
The second famous myth is closing an older, paid-off card helps your credit score. When in fact closing a card reduces your available credit, which increases your utilization. Therefore, dropping your score.
Almost 8 in 10 Americans that were surveyed didn’t know that closing an old, paid-off credit card hurts a person’s credit score both in the short and long term. The short-term impact is that it reduces your overall available credit, which results in higher utilization. The long-term impact is that the average age of your credit accounts will be reduced. A closed account remains on your credit report for 10 years, but its impact on your credit score diminishes as time goes on. This means you’ll lose the positive impact that a paid-off credit card in good standing has on your score. What we suggest is if your old card doesn’t have an annual fee, leave it open. To keep it active, set up a small recurring charge on the account, like an account with a monthly subscription charge and setup automatic payment from your checking account each month to ensure no late payments on your credit card account.
The final myth is you have three credit scores, one from each bureau. Truth be told, a consumer can have hundreds of credit scores, but they aren’t all equally valid.
Only a small percentage of Americans knew that most consumers have more than three credit scores. There are three major reporting bureaus – Experian, Equifax and TransUnion – so it’s likely for consumers to think each of these bureaus calculates one score, but that isn’t the case. While credit reporting data are taken from these three bureaus, there are lots of different scoring models, and not all of them are widely used by lenders. The most popular scoring model is called FICO. When a potential lender pulls your credit score, majority of the time it is being generated by FICO scores from the three major bureaus. The scores offered by free scoring sites typically are calculated using the VantageScore model. Although these scores indicate your overall credit health, they will never be the exact same numbers your creditors are seeing. Scores provided by monitoring site are generally just useful so that the consumer has an idea of where their score is.
You may want to consider what you were told about credit not everything you hear can be correct and could possibly be hurting you rather than helping you. For credit advised, call our office at (877) 552-1377.